Aug. 24 (Bloomberg) -- Former Bank of England policy maker Willem Buiter sparked the biggest debate at the Federal Reserve's annual mountainside symposium, saying the central bank pays too much heed to the concerns of financial institutions.
``The Fed listens to Wall Street and believes what it hears,'' Buiter said yesterday in a paper presented to the Fed's conference in Jackson Hole, Wyoming. ``This distortion into a partial and often highly distorted perception of reality is unhealthy and dangerous.''
The steepest interest-rate cuts in two decades risk stoking inflation, while the Fed has been too generous in aiding banks, said Buiter, 58, a founding member of the Bank of England's independent rate-setting board in 1997.
Buiter said the Fed's emergency lending programs are too generous. The U.S. central bank is making up to $200 billion of its Treasuries holdings available to primary securities dealers, and $150 billion of funds through auctions to commercial banks. In addition, banks are able to borrow directly from the Fed.
``You don't let your borrower determine the value of the collateral offered to you,'' Buiter said. ``That's just crazy.''
Two economists echoed Buiter's concern in another paper presented yesterday, saying the Fed's program allowing institutions to swap Treasuries for mortgage bonds and other debt enables firms to ``window dress'' their balance sheets.
``Financial institutions can hold low-quality securities for the period where no reporting is required,'' wrote Franklin Allen of the University of Pennsylvania and the University of Frankfurt's Elena Carletti. ``Temporarily increasing the supply of Treasuries makes this kind of deception easier. It helps remove market and regulator discipline.''
Ex-BOE Official Slams Fed
Very interesting article on Bloomberg. Here are some quotes (emphasis added):